As investigators figure out how the money disappeared, the ramifications for investors are large. If the money were stolen from a brokerage, as much as $500,000 per client should be covered by the Securities Investor Protection Corp., a nonprofit funded by the securities industry. However, SIPC doesn’t cover investment losses, and many of Bernard L. Madoff Investment Securities LLC’s clients had millions of dollars invested with the firm, far above the SIPC limit.
“The concepts blur in a Ponzi scheme where one person’s principal is another person’s profits,” said Jay Gould, a former SEC investment-management attorney who now runs the hedge-fund practice at Pillsbury Winthrop Shaw and Pittman LLP in San Francisco. “It’s the receiver’s job to go back and collect as many assets as possible, from whatever sources, including investors who withdrew assets from the scheme — whether those assets were characterized as principal or profit.”
In other words, those that withdrew early (and the concept of ‘early’ might go back a very long way in this case) may wind up writing checks. That could be more painful than simply losing money you haven’t spent yet.
Henry Blodget has a who’s who client list posted here. The comments there are worthy, particular those suggesting TARP money will save the day.
UPDATE: Calls for restitution. Yes, those comments were prescient.
UPDATE 2: Here we go – blaming the SEC. Meanwhile, it seems while Madoff was a relative unknown, every financial reporter on the face of the earth now has an ‘elderly neighbor’ who invested, and a ‘source’ who knew things were fishy.
UPDATE 3: And the SIPC is stepping in.